Staples, Inc. Announces Fourth Quarter and Full Year 2014 Performance

March 06, 2015 06:00 AM Eastern Standard Time

FRAMINGHAM, Mass.--(BUSINESS WIRE)--Staples, Inc. (Nasdaq: SPLS) announced today the results for its fourth
quarter and fiscal year ended January 31, 2015. Total company sales for
the fourth quarter of 2014 were $5.7 billion, a decrease of four percent
compared to the fourth quarter of 2013. On a GAAP basis, the company
reported a net loss of $260 million, or $0.41 per share, compared to net
income of $212 million, or $0.33 per diluted share, achieved in the
fourth quarter of 2013. Fourth quarter 2014 results on a GAAP basis
include $410 million of pre-tax charges for the impairment of goodwill
in the company’s Australia, China, and South America businesses, as well
as $74 million of pre-tax restructuring and other charges.

Total company sales grew one percent during the fourth quarter,
excluding the impact of store closures in North America during the past
year and changes in foreign exchange rates. Excluding the impact of
charges taken during the fourth quarter of 2014, the company reported
non-GAAP net income of $198 million, or $0.31 per diluted share.

Fourth Quarter 2014 Highlights

Achieved North American Commercial sales growth of five percent.

Grew sales in Staples.com eight percent in U.S. dollars, or nine
percent on a local currency basis.

Grew North American copy and print sales in the high single digits in
comparable stores, and double digits in both Staples.com and Contract.

Increased total company gross profit as a percentage of sales by 62
basis points.

Increased International Operations business unit income by 45 percent.

Secured more than $250 million of annualized cost savings in 2014 as
part of a previously announced plan to eliminate at least $500 million
of annualized costs by the end of 2015.

Closed 169 stores in North America in 2014 as part of a previously
announced plan to close at least 225 stores by the end of 2015.

Returned $496 million to shareholders through cash dividends and share
repurchases in 2014.

Fourth Quarter 2014 Financial Summary

Fourth Quarter

(dollar amounts in millions, except per share data)

2014

2013

Change

Total company sales

$5,656

$5,873

-3.7%

Total company sales excluding the impact of store closures and
changes in foreign exchange rates*

0.8%

GAAP operating income

-$197

$338

-$535

Non-GAAP operating income*

$287

$338

-$51

GAAP operating income rate

-3.5%

5.8%

-923 basis points

Non-GAAP operating income rate*

5.1%

5.8%

-69 basis points

GAAP net income

-$260

$212

-$473

Non-GAAP net income*

$198

$212

-$14

GAAP earnings per diluted share

-$0.41

$0.33

NM

Non-GAAP earnings per diluted share*

$0.31

$0.33

-6%

*Indicates a non-GAAP measure. Refer to “Presentation of Non-GAAP
Information” and the accompanying reconciliations for more detailed
information about these non-GAAP measures.

“During the fourth quarter we achieved strong sales growth in our North
American delivery businesses, further optimized our retail store
network, and improved profitability in our International business,” said
Ron Sargent, Staples’ chairman and chief executive officer. “Our
strategic reinvention is gaining momentum, and in 2015 we expect to
benefit from the investments we’ve made to accelerate sales and earnings
growth.”

Total company non-GAAP operating income rate declined 69 basis points to
5.07 percent from an operating income rate of 5.76 percent achieved
during the fourth quarter of 2013. This decline primarily reflects
increased incentive compensation and investments to accelerate growth.
The decline was partially offset by improved product margins and reduced
rent expense.

On a GAAP basis, the company’s effective tax rate for the fourth quarter
was negative 26.5 percent. The company’s non-GAAP effective tax rate for
the fourth quarter of 2014 was 28.6 percent, compared to the company’s
effective tax rate of 32.5 percent in the fourth quarter of 2013. This
decline reflects the December 2014 extension of certain provisions in
the U.S. tax code that allow for the deferral of income tax on certain
foreign earnings. This legislation resulted in a 32.0 percent non-GAAP
effective tax rate for the full year 2014, versus the company’s non-GAAP
effective tax rate of 32.5 percent for the full year 2013.

Full Year 2014 Financial Summary

Full Year

(dollar amounts in millions, except per share data)

2014

2013

Change

Total company sales

$22,492

$23,114

-2.7%

Total company sales excluding the impact of store closures and
changes in foreign exchange rates*

-0.1%

GAAP operating income

$310

$1,178

-$868

Non-GAAP operating income*

$959

$1,242

-$283

GAAP operating income rate

1.4%

5.1%

-371 basis points

Non-GAAP operating income rate*

4.3%

5.4%

-111 basis points

GAAP net income from continuing operations

$135

$707

-$572

Non-GAAP net income from continuing operations*

$623

$761

-$137

GAAP earnings per diluted share from continuing operations

$0.21

$1.07

-80%

Non-GAAP earnings per diluted share from continuing operations*

$0.96

$1.16

-17%

*Indicates a non-GAAP measure. Refer to “Presentation of Non-GAAP
Information” and the accompanying reconciliations for more detailed
information about these non-GAAP measures.

For the full year 2014, total company sales decreased three percent to
$22.5 billion compared to full year 2013. Total company sales were flat
versus the prior year, excluding the impact of store closures in North
America during the past year and changes in foreign exchange rates.

On a GAAP basis, the company reported net income from continuing
operations of $135 million, or $0.21 per share, compared to net income
of $707 million, or $1.07 per diluted share, achieved in the full year
2013. Excluding the impairment of goodwill during the fourth quarter of
2014, as well as restructuring and other charges recorded during 2014
and 2013, the company reported non-GAAP net income from continuing
operations of $623 million, or $0.96 per diluted share, during 2014,
compared to $761 million, or $1.16 per diluted share, achieved during
the prior year.

The company generated operating cash flow of $1.0 billion and invested
$361 million in capital expenditures in 2014, resulting free cash flow
of $682 million for the full year. The company utilized free cash flow
to repurchase 15 million shares for $189 million and returned $307
million to shareholders through cash dividends in 2014. At the end of
2014, the company had $1.7 billion in liquidity, including $627 million
in cash and cash equivalents.

Sales for the fourth quarter of 2014 were $2.7 billion, a decrease of
seven percent compared to the fourth quarter of 2013. Sales growth was
negatively impacted by approximately four percent due to store closures
during the past year. Changes in foreign exchange rates also negatively
impacted fourth quarter 2014 sales growth by approximately two percent.
Comparable sales, which combines comparable store sales and Staples.com
sales growth excluding the impact of changes in foreign exchange rates,
declined one percent versus the prior year. Sales declines in business
machines and technology accessories and computers, were partially offset
by growth facilities and breakroom supplies, cut sheet paper, copy and
print, furniture, and core office supplies. Comparable store sales
decreased four percent, reflecting a four percent decline in average
order size and a one percent decline in traffic versus the prior year.
Staples.com sales grew eight percent in U.S. dollars, or nine percent on
a local currency basis, during the fourth quarter of 2014. Operating
income rate decreased 108 basis points to 5.0 percent compared to the
fourth quarter of 2013. This decline primarily reflects increased
incentive compensation expense, investments to accelerate growth online,
as well increased delivery expense. This was partially offset by
increased gross margin rate in retail stores and online as a result of
favorable product mix, and reduced rent and labor expense as a result of
store closures.

For the full year 2014, North American Stores and Online achieved sales
of $10.4 billion, a decrease of six percent compared to 2013. Sales
growth was negatively impacted by approximately two percent due to store
closures during the past year. Changes in foreign exchange rates
negatively impacted full year 2014 sales growth by approximately one
percent. Full year 2014 operating income rate declined 208 basis points
to 4.5 percent versus 2013. In 2014, the company closed 152 stores in
the U.S. and closed 17 stores in Canada, ending the year with 1,679
stores in North America.

North American Commercial

Fourth Quarter

Full Year

(dollar amounts in millions)

2014

2013

Change

2014

2013

Change

Sales

$2,059

$1,963

4.9%

$8,271

$8,042

2.8%

Operating income

$145

$167

-$22

$571

$604

-$33

Operating income rate

7.1%

8.5%

-145 basis points

6.9%

7.5%

-61 basis points

Sales for the fourth quarter of 2014 were $2.1 billion, an increase of
five percent compared to the fourth quarter of 2013. This primarily
reflects growth in facilities and breakroom supplies, furniture, print
and promotional products, as well as business machines and technology
accessories, partially offset by sales declines in ink and toner.
Operating income rate decreased 145 basis points to 7.1 percent compared
to the fourth quarter of 2013. This decline primarily reflects higher
incentive compensation expense and investments in sales force to drive
growth in categories beyond office supplies. This was partially offset
by the positive impact of fixed expenses on increased sales.

For the full year 2014, North American Commercial achieved sales of $8.3
billion, an increase of three percent compared to 2013. Full year 2014
operating income rate decreased 61 basis points to 6.9 percent versus
2013.

International Operations

Fourth Quarter

Full Year

(dollar amounts in millions)

2014

2013

Change

2014

2013

Change

Sales

$898

$1,010

-11.1%

$3,773

$3,969

-5.0%

Operating income

$20

$14

$6

-$21

-$15

-$6

Operating income rate

2.2%

1.3%

84 basis points

-0.6%

-0.4%

-18 basis points

Sales for the fourth quarter of 2014 were $898 million, a decrease of
eleven percent in U.S. dollars and a decrease of one percent on a local
currency basis compared to 2013. This was primarily driven by a sales
decline in the European online business. Comparable store sales in
Europe declined two percent during the fourth quarter of 2014,
reflecting a decrease in traffic partially offset by an increase in
average order size versus the prior year. Operating income rate for
International Operations increased 84 basis points to 2.2 percent
compared to the fourth quarter of 2013. This increase primarily reflects
improved product margins in Europe and aggressive cost management in
Europe and Australia.

For the full year 2014, International Operations achieved sales of $3.8
billion, a decrease of five percent in U.S. dollars and a decrease of
two percent on a local currency basis compared to 2013. Full year 2014
operating income rate decreased 18 basis points to an operating loss of
0.6 percent compared to the prior year. The company ended the year with
284 stores in Europe.

Outlook

For the first quarter of 2015, the company expects sales to decrease
versus the first quarter of 2014. The company expects to achieve fully
diluted non-GAAP earnings per share in the range of $0.16 to $0.18 for
the first quarter of 2015. This guidance excludes any potential impact
on earnings per share related to restructuring and other related
activities or costs related to the company’s planned acquisition of
Office Depot. The company expects to record pre-tax charges in the range
of $15 million to $40 million associated with restructuring and other
related activities during the first quarter of 2015. For the full year
2015, the company expects to generate more than $600 million of free
cash flow.

Presentation of Non-GAAP Information

This press release presents certain results in 2014 with and without
restructuring charges, goodwill and long-lived asset impairment,
inventory write-downs, accelerated depreciation, and certain tax items.
This press release also presents certain results for 2014 both with and
without the impact of fluctuations in foreign currency exchange rates
and with and without the impact of store closures. The presentation of
these results, as well as the presentation of free cash flow, are
non-GAAP financial measures that should be considered in addition to,
and should not be considered superior to, or as a substitute for, the
presentation of results determined in accordance with GAAP. Management
believes that the non-GAAP financial measures enable management and
investors to understand and analyze the company’s performance by
providing meaningful information that facilitates the comparability of
underlying business results from period to period. Management uses these
non-GAAP financial measures to evaluate the operating results of the
company’s business against prior year results and its operating plan,
and to forecast and analyze future periods. Management recognizes there
are limitations associated with the use of non-GAAP financial measures
as they may reduce comparability with other companies that use different
methods to calculate similar non-GAAP measures. Management generally
compensates for these limitations by considering GAAP as well as
non-GAAP results. In addition, management provides a reconciliation to
the most comparable GAAP financial measure. With respect to earnings per
share and free cash flow, financial guidance on a GAAP basis has not
been provided given that current estimates for charges to be incurred
related to restructuring initiatives and the potential related impact on
cash flow represent broad ranges which are based on preliminary analysis
and are subject to change as plans become finalized.

Today's Conference Call

The company will host a conference call today at 8:00 a.m. (ET) to
review these results and its outlook. Investors may listen to the call
at http://investor.staples.com.

About Staples

Staples makes it easy to make more happen with more products and more
ways to shop. Through its world-class retail, online and delivery
capabilities, Staples lets customers shop however and whenever they
want, whether it’s in-store, online or on mobile devices. Staples offers
more products than ever, such as technology, facilities and breakroom
supplies, furniture, safety supplies, medical supplies, and Copy and
Print services. Headquartered outside of Boston, Staples operates
throughout North and South America, Europe, Asia, Australia and New
Zealand. More information about Staples (SPLS) is available at www.staples.com.

Certain information contained in this news release constitutes
forward-looking statements for purposes of the safe harbor provisions of
The Private Securities Litigation Reform Act of 1995 including, but not
limited to, the information set forth under “Outlook” and other
statements regarding our future business and financial performance. Any
statements contained in this news release that are not statements of
historical fact should be considered forward-looking statements. You can
identify forward-looking statements by the use of the words “believes”,
“expects”, “anticipates”, “plans”, “may”, “will”, “would”, “intends”,
“estimates”, and other similar expressions, whether in the negative or
affirmative, although not all forward-looking statements include such
words. Forward-looking statements are based on a series of expectations,
assumptions, estimates and projections which involve substantial
uncertainty and risk, including the review of our assessments by our
outside auditor and changes in management’s assumptions and projections.
Actual results may differ materially from those indicated by such
forward-looking statements as a result of risks and uncertainties,
including but not limited to: completion of the merger with Office Depot
is subject to conditions and if these conditions are not satisfied or
waived, the merger will not be completed; combining Staples and Office
Depot may be more difficult, costly, or time consuming than expected,
and the anticipated benefits and cost savings of the merger may not be
realized; we will incur significant indebtedness in connection with the
merger with Office Depot, which could reduce our flexibility to operate
our business and increase our interest expense; the agreements that will
govern the indebtedness to be incurred in connection with the merger
with Office Depot may contain various covenants that impose restrictions
that may affect our ability to operate our businesses; sales of shares
of our common stock before and after the completion of the proposed
Office Depot merger may cause the market price of our common stock to
fall; Several lawsuits have been filed against us and Office Depot and
its directors challenging the proposed merger, and an adverse ruling in
such lawsuits may prevent the proposed merger from becoming effective or
from becoming effective within the expected timeframe; if we fail to
meet the changing needs of our customers our business and financial
performance could be adversely affected; we face uncertainties
transforming our business, and our inability to successfully implement
our strategies could adversely affect our business and financial
performance; we have recognized substantial goodwill impairment charges
in the past and may be required to recognize additional goodwill
impairment charges in the future; we operate in a highly competitive
market and we may not be able to continue to compete successfully;
global economic conditions could adversely affect our business and
financial performance; our international operations expose us to risks
inherent in foreign operations; compromises of our information systems
or unauthorized access to confidential information or personal
information may materially harm our business or damage our reputation;
our effective tax rate may fluctuate; fluctuations in foreign exchange
rates could lead to lower earnings; we may be unable to attract, train,
engage and retain qualified associates; our quarterly operating results
are subject to significant fluctuation; our indebtedness could adversely
affect us by reducing our flexibility to respond to changing business
and economic conditions; our expanded offering of proprietary branded
products may not improve our financial performance and may expose us to
intellectual property liability, product liability, import/export
liability, government investigations and claims, and other risks
associated with global sourcing; problems in our information systems and
technologies may disrupt our operations; our business may be adversely
affected by the actions of and risks associated with third-parties;
various legal proceedings may adversely affect our business and
financial performance; failure to comply with laws, rules and
regulations could negatively affect our business operations and
financial performance; and those factors discussed or referenced in our
most recent annual report on Form 10-K filed with the SEC, under the
heading “Risk Factors” and elsewhere, and any subsequent periodic or
current reports filed by us with the SEC. In addition, any
forward-looking statements represent our estimates only as of the date
such statements are made (unless another date is indicated) and should
not be relied upon as representing our estimates as of any subsequent
date. While we may elect to update forward-looking statements at some
point in the future, we specifically disclaim any obligation to do so,
even if our estimates change.

Add: Cash and cash equivalents attributed to disposal group held for
sale at February 1, 2014

7,868

(7,868

)

Cash and cash equivalents at the end of the period

$

627,174

$

492,532

STAPLES, INC. AND SUBSIDIARIES

Segment Reporting

(Dollar Amounts in Thousands)

(Unaudited)

13 Weeks Ended

52 Weeks Ended

January 31, 2015

February 1, 2014

January 31, 2015

February 1, 2014

Sales

North American Stores & Online

$

2,698,659

$

2,899,522

$

10,448,603

$

11,103,160

North American Commercial

2,059,371

1,963,381

8,270,682

8,041,613

International Operations

898,437

1,010,370

3,773,075

3,969,490

Total segment sales

$

5,656,467

$

5,873,273

$

22,492,360

$

23,114,263

Business Unit Income (Loss)

North American Stores & Online

$

134,636

$

175,924

$

473,068

$

733,465

North American Commercial

145,447

167,168

570,831

603,972

International Operations

19,609

13,538

(21,181

)

(15,219

)

Business unit income

299,692

356,630

1,022,718

1,322,218

Stock-based compensation

(13,072

)

(18,519

)

(64,123

)

(80,632

)

Impairment of goodwill and long-lived assets

(433,689

)

—

(469,663

)

—

Restructuring charges

(44,411

)

—

(170,878

)

(64,085

)

Gain on sale of businesses, net

—

—

27,495

—

Inventory write-downs

—

—

(26,307

)

—

Accelerated depreciation

(5,039

)

—

(9,376

)

—

Interest and other expense, net

(9,292

)

(23,470

)

(41,731

)

(114,696

)

(Loss) income from continuing operations before income taxes

$

(205,811

)

$

314,641

$

268,135

$

1,062,805

Historically we have evaluated performance and allocated resources based
on profit or loss from operations before goodwill and long-lived asset
impairment charges, restructuring costs, stock-based compensation,
interest and other expense, non-recurring items and the impact of
changes in accounting principles ("business unit income"). Beginning in
2014, business unit income also excludes accelerated depreciation and
amortization and inventory write-downs associated with restructuring
activities.

STAPLES, INC. AND SUBSIDIARIES

Reconciliation of GAAP to Non-GAAP Income Statement Disclosures

(Dollar Amounts in Thousands, Except Per Share Data)

(Unaudited)

13 Weeks Ended

January 31, 2015

GAAP

Restructuringcharges

AcceleratedDepreciation

Impairment of goodwill andlong-livedassets

Non-GAAP

Operating (loss) income

$

(196,519

)

$

44,411

$

5,039

$

433,689

$

286,620

Interest and other expense, net

(9,292

)

(9,292

)

(Loss) income from continuing operations before income taxes

(205,811

)

277,328

Income tax expense

54,541

54,541

Adjustments

—

24,836

Adjusted income tax expense

54,541

79,377

(Loss) income from continuing operations

$

(260,352

)

$

197,951

Effective tax rate

(26.5

)%

28.6

%

Diluted earnings per common share

$

(0.41

)

0.31

Weighted average common shares outstanding

637,853

637,853

Effect of dilutive securities

—

5,304

Weighted average common shares outstanding assuming dilution

637,853

643,157

STAPLES, INC. AND SUBSIDIARIES

Reconciliation of GAAP to Non-GAAP Income Statement Disclosures
(continued)

(Dollar Amounts in Thousands, Except Per Share Data)

(Unaudited)

52 Weeks Ended

January 31, 2015

GAAP

Inventorywrite-downs

Restructuringcharges

Accelerateddepreciation

Impairment of goodwill &long-livedassets

Gain on saleofbusinesses,net

Non-GAAP

Gross profit

$

5,801,036

$

26,307

—

—

—

$

5,827,343

Gross profit rate

25.8

%

25.9

%

Operating income

309,866

26,307

170,878

9,376

469,663

(27,495

)

958,595

Interest and other expense, net

41,731

41,731

Income from continuing operations before income taxes

268,135

916,864

Income tax expense

133,609

133,609

Adjustments

—

160,011

Adjusted income tax expense

133,609

293,620

Income from continuing operations

$

134,526

$

623,244

Effective tax rate

49.8

%

32.0

%

Diluted earnings per common share

$

0.21

$

0.96

STAPLES, INC. AND SUBSIDIARIES

Reconciliation of GAAP to Non-GAAP Sales Growth

(Unaudited)

Staples.com Sales Growth

Fourth quarter of fiscal 2014

Fourth quarter of fiscal 2013

Change

GAAP sales

$

663,170

$

614,073

$

49,097

GAAP sales growth

8.0

%

Impact of changes in exchange rates

$

9,040

Non-GAAP sales

$

672,210

$

614,073

$

58,137

Non-GAAP sales growth

9.5

%

Fiscal 2014

Fiscal 2013

Change

GAAP sales

$

2,393,314

$

2,233,019

$

160,295

GAAP sales growth

7.2

%

Impact of changes in exchange rates

$

28,549

Non-GAAP sales

$

2,421,863

$

2,233,019

$

188,844

Non-GAAP sales growth

8.5

%

13 Weeks Ended January 31, 2015

Sales Growth GAAP

Impact of LocalCurrency

Sales Growth on a Local CurrencyBasis

Sales:

North American Stores & Online

(6.9

)%

1.7

%

(5.2

)%

North American Commercial

4.9

%

0.5

%

5.4

%

International Operations

(11.1

)%

9.8

%

(1.3

)%

Total sales

(3.7

)%

2.7

%

(1.0

)%

52 Weeks Ended January 31, 2015

Sales Growth GAAP

Impact of LocalCurrency

Sales Growth on a Local CurrencyBasis

Sales:

North American Stores & Online

(5.9

)%

1.4

%

(4.5

)%

North American Commercial

2.8

%

0.5

%

3.3

%

International Operations

(4.9

)%

2.9

%

(2.0

)%

Total sales

(2.7

)%

1.3

%

(1.4

)%

This presentation refers to growth rates in local currency so that
business results can be viewed without the impact of fluctuations in
foreign currency exchange rates, thereby facilitating period-to-period
comparisons of Staples' business performance. To present this
information, current period results for entities reporting in currencies
other than U.S. dollars are converted into U.S. dollars at the prior
year average monthly exchange rates.

STAPLES, INC. AND SUBSIDIARIES

Reconciliation of GAAP to Non-GAAP Sales Growth (continued)

(Unaudited)

13 Weeks EndedJanuary 31, 2015

52 Weeks EndedJanuary 31, 2015

GAAP sales growth

(3.7

)%

(2.7

)%

Impact of change in exchange rates

(2.7

)%

(1.3

)%

Impact of store closures

(1.8

)%

(1.2

)%

Non-GAAP sales growth *

0.8

%

(0.1

)%

* Figures may not foot due to rounding.

STAPLES, INC. AND SUBSIDIARIES

Reconciliation of Free Cash Flow Disclosures

(Dollar Amounts in Thousands)

(Unaudited)

52 Weeks Ended

January 31, 2015

February 1, 2014

Net cash provided by operating activities

$

1,042,938

$

1,108,286

Acquisition of property and equipment

(360,866

)

(371,229

)

Free cash flow

$

682,072

$

737,057

Free cash flow is not defined under U.S. GAAP. Therefore, it should not
be considered a substitute for income or cash flow data prepared in
accordance with GAAP and may not be comparable to similarly titled
measures used by other companies. The company defines free cash flow as
net cash provided by operating activities less capital expenditures. It
should not be inferred that the entire free cash flow amount is
available for discretionary expenditures. The company believes free cash
flow is a useful measure of performance and uses this measure as an
indication of the company's ability to generate cash and invest in its
business.